asset liability management cliftonlarsonallen

8/11/2019 Asset Liability Management Cliftonlarsonallen

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2014CliftonLarson

AllenWealthAdvisors,

LLC

2014Clifto

nLarsonAllenWealthAdvisors,

LLC

CLAconnect.com/privateclient

Asset/Liability Management2nd Annual Foundation Conference

February 5, 2014

Tony Hallada, CEO

Steven D. Jones, CFA, CFP, CAIA

Director, Institutional Investment Services


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Asset/Liability Management

Agenda

Brief History

Benefits

Liability Stream

Option 1: Cash Reserve Option 2: Cash Matching

Option 3: Duration Matching

Option 4: Monte Carlo Simulation

Option 5: Targeted Scenarios - Stress Testing

Portfolio Construction

Market Outlook 2014

2


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Brief History

3

ALM was pioneered by banks and insurance companies.

In highly levered

organizations, changes

in the balance sheet

can overwhelm

operating results.


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Brief History (cont.)

4

Ideally, assets are selected that move in tandem with liabilities.

Properly matching

assets to liabilities

can help stabilize

residual equity.

Later adopted by corporations to manage their DB pension plans.


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Benefits

Supports strategic planning efforts

Allows operations to drive success by stabilizing

residual equity

Helps avoid forced selling of assets Provides insight and guidance towards defining the

appropriate Time Horizon, Return Objective, and Risk

Tolerance

Supports compliance with UPMIFA

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Supports Compliance with UPMIFA

6

In managing and investing an institutional fund, the following factors, if

relevant, must be considered:

(A) general economic conditions;

(B) the possible effect of inflation or deflation;

(C) the expected tax consequences, if any, of investment decisions or strategies;(D) the role that each investment or course of action plays within the overall

investment portfolio of the fund;

(E) the expected total return from income and the appreciation of investments;

(F) other resources of the institution;

(G) the needs of the institution and the fund to make distributions and topreserve capital; and

(H)an assets special relationship or special value, if any, to the charitable

purposes of the institution. *

* SOURCE: UNIFORM PRUDENT MANAGEMENT OF INSTITUTIONAL FUNDS ACT (Model Act)


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Liability Steam

7

ALM requires construction of liability stream

Part art / part science

Definition net cash flows associated with an investment


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Liability Steam (cont.)

8

Possible data sources for constructing your liability stream:

- Business plan (revenue, expenses, capital budget)

- Projections from Sources and Uses of Funds Statement

- Pro Forma financial projections (EBIDA)


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Option 1: Cash Reserve

9

Set aside enough cash to cover 12-36 months of possible cash

outflows.

Advantages

- Simple

- Low risk

Disadvantages

- Low return on cash investments


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Option 2: Cash Matching

10

Create a structured bond portfolio with principal and interest

payments coming due as needed to cover all expected cash

outflows.

Advantages

- Simple

- Low risk

Disadvantages

- Interest rates at historic lows

- Future cash flow needs may change


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Option 3: Duration Matching

11

Used to manage interest rate risk (banks, insurance, DB plans)

Duration is (roughly) the PV, time-weighted average maturity

Residual equity is immune to changes in interest rates when

Duration

Assets

=Duration

Liabilities

PV(Assets)

PV(Liabilities)

Funded Status

$0

$2

$4

$6

$8

$10

$12

3.50 3.75 4.00 4.25 4.50 4.75 5.00 5.25 5.50 5.75 6.00

PV Calculation

Interest Rates


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Option 3: Duration Matching (cont.)

12

Advantages

- Flexible, allows tailored risk exposures

Disadvantages

- Complex, may require professional management

- Requires periodic rebalancing


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Option 4: Monte Carlo Simulation

13

Computerized statistical modeling technique used to randomly

generate of a large number of possible outcomes.

Advantages- May help identify unexpected extreme outcomes

Disadvantages

- Too many possible outcomes to draw meaningful insight

- Dependant upon underlying probability distribution


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15

Scenario Analysis

Business modeling technique used to monitor key organizational

metrics.

Advantages

- Generates targeted results, more easily understood

Disadvantages

- Garbage in / garbage out

- Real world may vary substantially from expectations


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16

STEPS

Define liability stream

Determine least-risk portfolio

- Not necessarily 90-day T-bills- What asset best moves in tandem with liability stream?

Examples:

DB pensions are interest rate sensitive

Perpetuity investors are inflation sensitive

Stress test

- Incrementally increase expected risk/return

- Examine potential impact on key business metrics




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Portfolio Construction

17

Once the target risk/return has been identified, its time to

construct a portfolio that can reasonably be expected to

achieve the desired result in an efficient manner.

Construct portfolio asset allocation is primary driver

Desired result match expected risk/return target

Efficient manner Sharpe ratio


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THE OTHER SIDE OF THE CREDIT SUPER CYCLE

The Debt Deleveraging Cycle

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U.S. Banks Have Restored Their Balance Sheets

and Are Now Back to Record Profitability.

Source: FDIC

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Corporations Have Delevered

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Corporations Have Delevered

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Consumers Are Delevering

DAVIS145

Quarterly Data 3/31/1980 - 6/30/2013

High Debt Service

Low Debt Service

Source: Department of CommerceBureau of Labor Statistics

Federal Reserve Board

Household Debt Service Ratio

(Minimum Debt Service Paymenton Mortgage Debt and Consumer Creditas a % of Disposable Personal Income)

( )

Nominal GDP

Gain/Annum When:

Gain/ %Debt Service Ratio is: Annum of Time

Above 12.8% 2. 3 12. 0

Between 11% and 12.8% 5. 5 59. 4

* Below 11% 6. 9 28. 6

Real GDP

Gain/Annum When:


Above 12.8% 0. 2 12. 0

Between 11% and 12.8% 2. 9 59. 4

* Below 11% 3. 2 28. 6

Nonfarm PayrollsGain/Annum When:


Above 12.8% -0.8 12. 0

Between 11% and 12.8% 1. 3 59. 4

* Below 11% 1. 9 28. 6

9.9

10.0

10.1

10.2

10.3

10.4

10.5

10.610.7

10.8

10.9

11.0

11.1

11.2

11.3

11.4

11.5

11.6

11.7

11.8

11.912.0

12.1

12.2

12.3

12.4

12.5

12.6

12.7

12.8

12.9

13.0

13.1

13.2

13.313.4

9.9

10.0

10.1

10.2

10.3

10.4

10.5

10.610.7

10.8

10.9

11.0

11.1

11.2

11.3

11.4

11.5

11.6

11.7

11.8

11.912.0

12.1

12.2

12.3

12.4

12.5

12.6

12.7

12.8

12.9

13.0

13.1

13.2

13.313.4

1980 1985 1990 1995 2000 2005 2010

Household Debt Service Ratio's Potential Impact On Growth

Chart has been reanalyzed due to data revisions.

Copyright 2013 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved..www.ndr.com/vendorinfo/. For data vendor disclaimers refer towww.ndr.com/copyright.htmlSee NDR Disclaimer at

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Consumers Are Delevering

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The Last Stage of Delevering is the Federal

Government

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The Last Stage of Delevering is the Federal

Government

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nAllenWealthAdvisors,

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Buying assets from banks continues to be the number one

investment opportunity.

We believe we are in a long-term bull market for equities. Growth

stocks continue to be the number one opportunity in the public

market. The IBD 50 or simple ETF strategies most likely shouldperform best in this type of environment.

Gold most likely continues its descent in its current bear market

due to fiscal improvement at the sovereign government level.

High quality bonds will be challenging over the next 12-24 months

as the 10-year treasury moves toward our target of 3.50 percent by

mid-2014 and 4.25 percent by mid-2015.

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Outlook for 2014


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nAllenWealthAdvisors,

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High yield municipal bonds, distressed debt, and floating rate

investments continue to be the best place to invest in the bond market.

Re-flationary fixed income should add value to a fixed income

allocation again in 2014 (REITs, MLPs, Royalty Trusts). Stocks will most likely have a large correction some time near the end

of Q1 2014 and that will be the next buying opportunity.

Private real estate and private credit are much more attractively valued

than the public markets. Buy real estate from banks and servicers.

Buy debt from banks and servicers.

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Outlook for 2014 (continued)


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Tony R. HalladaCEO | CliftonLarsonAllen Wealth Advisors, LLC

PROFILETony is the CEO, managing principal, and an investment committee member of CliftonLarsonAllen Wealth Advisors, LLC. Based on Tonys belief in life

planning, he challenges conformity and motivates people to discover the abundant possibilities life holds.

EXPERIENCE IN SERVING CLIENTS

Tonys clients benefit from a close, personal relationship with him and objective advice aimed at getting them where they want to go in life. He has a broadrange of experience in the capital markets and financial services industry, and is passionate about offering boutique investment strategies. During his more

than 20-year tenure, he has also served as the vice president of Nuveen Investments and John G. Kinnard & Company. In addition, his clients appreciate the

work experiences he gained at his familys closely held Ford and International Harvester dealership. Between the ages of 12 and 21, he worked in all facets of

the family business. By the time he graduated from college, he was a shareholder and was managing the front end of the dealership.

EDUCATION/PROFESSIONAL INVOLVEMENTTony earned a BA from the University of Wisconsin-Madison and is a graduate of the University of Minnesota Carlson School of Business Executive

Management Program. Tony is a member of the Financial Planning Association. He holds FINRA Series 7, 63, 65, and 24 licenses, and Minnesota Life and

Health Insurance licenses. In 2012 and 2013, he was named a Five Star Wealth Manager by Twin Cities Business.

SPECIAL INTERESTSTony resides in Medina, Minnesota with his wife Teresa, son Mason, and daughter Hannah. His hobbies include golf, basketball, biking, skiing, and reading.

Tony is an active church member, coaches his sons baseball team, and finds personal fulfillment in mentoring kids, especially those who have been adopted.

CONTACT INFORMATION612-376-4529

[email protected]



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Steven D. Jones, CFA, CFP, CAIADirector, Institutional Investment Services | CliftonLarsonAllen Wealth Advisors, LLC

PROFILESteven is the Director of the Institutional Investment Services at CliftonLarsonAllen Wealth Advisors, LLC. He has over thirty years of investment management

experience with expertise in all major asset classes, and specializes in asset/liability management, macroeconomic analysis and asset allocation strategies.

EXPERIENCE IN SERVING CLIENTS

Steven began serving institutional clients in 1990, as a portfolio manager for a major trust company in St. Louis. In 2006, he joined LarsonAllen Financial andexpanded his client facing skills to include high net worth individuals. In 2009, Steven joined Hammond Associates as a Senior Investment Consultant where

he served foundations, endowments, healthcare and high net worth clients.

EDUCATION/PROFESSIONAL INVOLVEMENTSteven is a CFA charterholder and serves as the Immediate Past President of the CFA Society of St. Louis. He also holds the following designations: Chartered

Alternative Investment Analyst (CAIA) and the Certified Financial Planner (CFP). Steven received his MBA from Washington University in St. Louis and his

BSBA from the University of Missouri-Columbia, where his major was Finance & Banking.

SPECIAL INTERESTSSteven currently resides in St Louis with his wife and youngest daughter. His eldest daughter is attending the University of Missouri-Columbia. Steven is an

active member of the St. Gerard parish. He likes to ride bikes with his wife on the many trails in-and-around St. Louis. Stevens hobbies include guitar,

singing, exercising, movies and watching the Rams and Cardinals.

CONTACT INFORMATIONMobile 314-795-1095

[email protected]


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